Banking Regulation Act — Statutory Liquidity Ratio (Section 24)

Every rupee a bank accepts as a deposit is somebody else's savings, repayable on demand or on a fixed date. Section 24 of the Banking Regulation Act, 1949 answers a deceptively simple question that protects those savings: before a bank lends out the public's money, how much must it keep parked in safe, liquid form? The Statutory Liquidity Ratio (SLR) is the statutory floor of liquidity — a percentage of a bank's net demand and time liabilities that must always be held in cash, gold or unencumbered approved securities. This chapter dissects Section 24 subsection by subsection, traces the 40 per cent ceiling, the eligible-asset list, the Form VIII return and the escalating penal interest for default, and situates SLR within the Reserve Bank's wider depositor-protection mandate as the courts have understood it.

What the Statutory Liquidity Ratio is, and the mischief it cures

The Statutory Liquidity Ratio is the minimum proportion of a bank's net demand and time liabilities (NDTL) that the bank must, at the close of business on every day, maintain in India in the form of liquid assets — cash, gold or unencumbered approved securities. It is not money lodged with the regulator; it stays on the bank's own balance sheet but is frozen from being lent out. The object is prudential: to guarantee that, however aggressively a bank expands credit, a defined slice of its obligations is always backed by assets that can be turned into cash quickly to meet a run on deposits or a sudden demand for repayment.

The provision must be read against the structural reality of banking. A bank borrows short (deposits repayable on demand) and lends long (loans and advances). That maturity mismatch is the source of both banking's profitability and its fragility. Section 24 inserts a statutory buffer into that mismatch. The Supreme Court has repeatedly stressed that the entire scheme of the Act is animated by the protection of depositors and the stability of the banking system, a theme it developed in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, where it upheld the special, stringent regulatory regime applicable to banks precisely because they deal with public money. SLR is one of the oldest tools in that regime. For the wider statutory architecture, see our Banking Regulation Act and RBI Act hub and the introductory chapter.

The text and scheme of Section 24

Section 24 is headed "Maintenance of a percentage of assets". Its sub-section (1) prohibits a banking company from making any loan or advance against the security of its own shares — a self-standing prudential bar against a bank inflating its own capital. The liquidity obligation proper sits in sub-section (2A), inserted by the Banking Laws (Amendment) Act, 1962 and refined by later amendments. It commands every banking company to maintain in India, in cash, gold or unencumbered approved securities valued at a price not exceeding the current market price, an amount which shall not, at the close of business on any day, be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight as the Reserve Bank may, by notification in the Official Gazette, specify from time to time.

Three features of this drafting are examinable. First, the floor is a percentage of NDTL, not a fixed sum, so the obligation scales with the bank's deposit base. Second, the percentage is fixed by the Reserve Bank by notification, not by the statute — Parliament delegated the dial to the central bank, subject to a statutory ceiling discussed below. Third, the assets must be unencumbered: securities already pledged to secure a borrowing cannot do double duty as SLR assets. The valuation is at market price determined in accordance with the method the RBI directs, so a bank cannot dress up a depleted portfolio by carrying impaired securities at par.

The 40 per cent statutory ceiling on SLR

Although the Reserve Bank fixes the operative SLR, it does not have an unlimited hand. Section 24(2A) caps the percentage the RBI may prescribe: the SLR cannot exceed 40 per cent of a bank's total demand and time liabilities. This ceiling is the legislative guardrail on a power otherwise delegated to the executive arm. The figure has historical significance — for long stretches before liberalisation the prescribed SLR hovered near the ceiling (38.5 per cent in 1990), effectively pre-empting a large share of bank deposits into government paper and financing the fiscal deficit. Post-reform, the operative rate has been steered far below the ceiling, but the 40 per cent statutory maximum remains the outer limit of the RBI's discretion under the section.

The distinction between the statutory ceiling (40 per cent, fixed by Parliament) and the operative rate (notified by the RBI within that ceiling) is a favourite of examiners. A candidate who writes that "SLR is 40 per cent" has confused the maximum with the prevailing rate. The correct statement is that SLR is whatever percentage the RBI notifies, subject to a maximum of 40 per cent of NDTL. The power to move the rate within the ceiling is part of the RBI's monetary-policy and credit-control toolkit, of a piece with the powers surveyed in RBI Act — functions and powers.

Which assets count: cash, gold and approved securities

Section 24 confines SLR to three classes of asset, each defined narrowly. Cash means cash maintained in India, and crucially includes the bank's net balance with the Reserve Bank that is in excess of the balance it is already obliged to keep under Section 42 of the Reserve Bank of India Act, 1934 — that is, the surplus over its Cash Reserve Ratio (CRR) requirement. A bank cannot count the same rupee twice: only the excess over CRR qualifies as an SLR asset. Gold means gold valued at a price not exceeding the current market price. Unencumbered approved securities are securities in which a trustee may invest under the Indian Trusts Act, 1882, together with such other securities as the Central Government may, by notification, declare to be approved securities — overwhelmingly dated Government of India securities, Treasury Bills and State Development Loans.

The RBI's Master Circular on CRR and SLR, issued under Section 35A of the Act, fleshes out the eligible-asset universe — government dated securities, securities issued under the market borrowing programme, and instruments the RBI notifies from time to time, with deductions for any portion that is encumbered. That such circulars carry binding statutory force, and are not mere administrative advice, was affirmed by the Supreme Court in ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1, where the Court treated RBI guidelines issued under the Act as having the force of law in regulating the business of banking. The interplay between the bank's holdings of government paper and the RBI's role as banker to government is explored in RBI Act — functions and powers.

Computing net demand and time liabilities (NDTL)

The SLR percentage bites on NDTL, so the section is only as precise as the definition of the base. Demand liabilities are those payable on demand — current account balances, the demand portion of savings deposits, margins held against letters of credit and guarantees, unclaimed deposits, demand drafts and so on. Time liabilities are payable otherwise than on demand — fixed deposits, cash certificates, the time portion of savings balances, and staff security deposits. The two together, net of inter-bank assets within the banking system, give NDTL.

The RBI Master Circular lists liabilities that do not form part of NDTL for reserve purposes: paid-up capital and reserves, credit balances in the profit and loss account, loans taken from the RBI, refinance from NABARD, SIDBI, NHB and EXIM Bank, and certain pass-through items. These exclusions matter because they prevent the base from being inflated by the bank's own capital and by central-institution refinance, which are not depositor money. The bank reports its SLR position on a fortnightly basis, reckoned with reference to NDTL as on the last Friday of the second preceding fortnight, which gives the system a stable, auditable reference date rather than a fluctuating daily base.

SLR distinguished from the Cash Reserve Ratio (CRR)

SLR is constantly confused with the Cash Reserve Ratio, and distinguishing the two is a near-certain examination point. The Cash Reserve Ratio is a creature of Section 42 of the Reserve Bank of India Act, 1934, not of the Banking Regulation Act. CRR is the percentage of NDTL that a scheduled bank must keep as a cash balance with the Reserve Bank itself. SLR, by contrast, arises under Section 24 of the Banking Regulation Act, 1949 and is held by the bank in its own books in cash, gold or approved securities. CRR is reported in the Form A return under Section 42(2) of the RBI Act; SLR is reported in the Form VIII return under Section 24.

The functional difference follows from the form. CRR is a sterile, non-interest-earning balance locked with the central bank — its primary purpose is monetary control, draining or releasing liquidity from the system. SLR assets earn a return (the coupon on government securities) and remain with the bank, serving mainly a prudential, depositor-protection function while incidentally directing credit to government paper. A bank's excess balance with the RBI over and above its CRR obligation may be counted towards SLR, but the CRR balance itself cannot — the statute is careful to prevent double counting. The CRR mechanism and the RBI's broader monetary levers are treated in RBI Act — functions and powers and in RBI Act — regulation of currency.

The Reserve Bank's power to fix and vary SLR

The operative SLR is set by RBI notification in the Official Gazette under Section 24(2A), subject to the 40 per cent ceiling. This is a delegated legislative power, and like other delegated powers it must be exercised for the purposes of the Act and within its limits. The courts have been markedly deferential to the Reserve Bank in matters of economic and monetary regulation. In Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., (1987) 1 SCC 424, the Court emphasised that the RBI's regulatory powers exist to protect the interests of depositors and to prevent exploitation of ignorant subscribers, and read the relevant statutes in their full text and context to advance that purpose. The same protective philosophy underlies the SLR power.

When the Peerless litigation returned to the Supreme Court in Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, (1992) 2 SCC 343, the Court again upheld the RBI's directions regulating residuary deposit-taking, reiterating that judicial review of the central bank's economic judgments is narrow and that courts will not substitute their own view of monetary wisdom for the regulator's. The clear doctrinal upshot is that a challenge to a notified SLR rate would face an exacting threshold: a litigant would have to show that the rate exceeds the statutory ceiling, was fixed for a collateral purpose, or is otherwise ultra vires the section, rather than merely arguing that the rate is economically unsound.

Form VIII returns and the reporting obligation

Section 24(3) requires every banking company to furnish to the Reserve Bank a monthly return showing the amount of liquid assets it held at the close of business on each alternate Friday (and the corresponding NDTL). This is the Form VIII return — the statutory instrument through which compliance with SLR is monitored, distinct from the Form A return used for CRR under the RBI Act. The return is the regulator's window into whether the floor has been observed on a continuing basis, not merely on a reporting date.

The reporting architecture is deliberately frequent and granular because the obligation is a daily one. The bank must maintain the prescribed percentage at the close of business on every day, and the alternate-Friday and second-preceding-fortnight references are reckoning devices for computing the required amount, not a licence to dip below the floor on intervening days. A bank that games the reference date by window-dressing its securities holdings over the reporting Friday while running below the floor on other days defeats the prudential purpose and exposes itself to the penalty regime in sub-section (4).

Penalty for default under Section 24(4)

Section 24(4) supplies the teeth. If a banking company fails to maintain the prescribed SLR on any day, it becomes liable to pay to the Reserve Bank, in respect of that day's default, penal interest calculated on the amount of the shortfall. For a first default the penal interest is at the rate of three per cent per annum above the Bank Rate on the amount by which the holding falls short of the prescribed minimum. If the default continues on the next succeeding day, the rate escalates to five per cent per annum above the Bank Rate for the period of the continuing default. Anchoring the penalty to the Bank Rate makes it self-adjusting with the cost of money, so the deterrent does not erode as interest rates move.

The penalty is recoverable as a debt: it is payable within a period specified in the Reserve Bank's demand notice, and on failure the RBI may recover it through the principal civil court of the district. Persistent default can also feed into the RBI's wider supervisory powers under the Act — including directions under Section 35A and, in extreme cases, action affecting the bank's licence under Section 22 — so SLR breach is rarely a stand-alone event but a symptom that invites broader regulatory scrutiny.

Exemptions and the reach of the section

Section 24 applies to banking companies, and by Section 56 the SLR regime is extended (with modifications) to co-operative banks. For co-operative banks the eligible-asset list is adjusted: a central co-operative bank, for instance, may count unencumbered balances and term deposits maintained with the State co-operative bank of the State concerned, in excess of the balance required under Section 18 read with Section 56. Regional Rural Banks and certain categories are dealt with through their own modified dispensations and RBI directions.

The RBI Master Circular also lists liabilities excluded from the NDTL base (capital, reserves, RBI and refinance borrowings) and specific exempted categories, ensuring that the SLR obligation falls only on genuine depositor liabilities. The careful tailoring of who is covered, on what base, and with which eligible assets reflects the section's single-minded aim: that institutions holding public deposits keep a real, liquid buffer proportionate to those deposits. The placement of banks in a special regulatory class, distinct from ordinary companies, was constitutionally vindicated in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, which remains the doctrinal foundation for treating banking regulation, SLR included, as a sui generis field justified by the public interest in depositor safety.

SLR as a monetary and quasi-fiscal instrument

Beyond its prudential face, SLR has long had a monetary and fiscal dimension. By compelling banks to hold a slice of their deposits in approved securities — overwhelmingly government paper — the section creates a captive, statutorily guaranteed market for government borrowing. A high SLR therefore pre-empts bank credit away from the private sector and channels it to the exchequer, while a reduction in SLR releases lendable resources into the economy. This is why successive economic reform committees treated the progressive lowering of SLR as central to financial liberalisation.

This dual character is examinable as a critique. Critics argue that a high SLR amounts to financial repression — forcing banks to finance the deficit at below-market terms and crowding out private credit. Defenders point to the depositor-protection and systemic-stability rationale and to SLR's utility as a counter-cyclical lever. For an examination answer, the balanced position is that Section 24 is simultaneously a prudential floor, a credit-control instrument and a quasi-fiscal device, and that the RBI's power to vary the rate within the 40 per cent ceiling allows it to dial up whichever function the moment demands. The instrument sits alongside the currency and note-issue functions discussed in RBI Act — issue of bank notes.

Judicial attitude and the standard of review

The case law on Section 24 and its cognate provisions reveals a consistent judicial posture of deference to the Reserve Bank in technical, economic regulation, tempered by insistence that the regulator act within statutory limits and for the statute's purposes. Joseph Kuruvilla Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371, established that banks may be subjected to a special and exacting regulatory regime that would be impermissible for ordinary companies, because banks handle public deposits whose loss inflicts disproportionate public harm. The classification of banks as a distinct class for stricter regulation survived the Article 14 challenge on the strength of this intelligible differentia.

The Peerless decisions — Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd., (1987) 1 SCC 424, and Peerless General Finance and Investment Co. Ltd. v. Reserve Bank of India, (1992) 2 SCC 343 — confirm that the RBI's regulatory directions, exercised to protect depositors, attract a narrow standard of judicial review. And ICICI Bank Ltd. v. Official Liquidator of APS Star Industries Ltd., (2010) 10 SCC 1, establishes that RBI circulars and guidelines under the Act carry statutory force — directly relevant to SLR, where the operative content (eligible assets, valuation, exemptions) lives in the Master Circular rather than in the bare section. Taken together, these authorities mean that the SLR machinery, though it leaves much to RBI notification and circular, rests on a firm and judicially endorsed statutory footing.